First property - owner occupied or investment?

Question

Hi all-

I'm a new investor looking for my first property, and find myself at a bit of a crossroads in terms of strategy.

I live in Washington, DC, and my current goal is to get a small multi-family or house-hackable single family. I've been encouraged by my boss and mentor to owner-occupy my first property, primarily to take advantage of lower rates and cut my own living expenses in the process.
However, I'm running into some issues based on affordability. Simply, there's not a ton of deals here that I'd be able to get a loan for (mostly based on my income rather than down payment) and the ones that I can afford/qualify for are generally in neighborhoods I wouldn't feel comfortable living in.

My question to more experienced investors is, given all that, is it worth looking into buying a place strictly as an investment (either locally or long-distance)? Generally, how much more should I expect to pay in interest rates, fees, and down payment? Or should I just be patient, and keep searching for an owner-occupiable place that fits my situation? Thanks in advance for your thoughts!

Ron Gallagher · Answer

What is the price range you are looking at? You can also house hack with condos, I guess it would be called "condo hacking." Anyway, if you can't afford a house in DC then I would look at buying a condo with a low condo fee in an area in DC that you (and your new roommates) would want to live in. If you can only afford a one bedroom condo then put up some temp walls or create a wall with book cases, etc in the living room and turn the 1 bedroom condo into a two "bedroom" condo with no common area, then get a roommate for the actual bedroom.

Then in about a year or two, rent out the condo and at that point maybe you are ready to qualify to buy a house that's in a good neighborhood and then you move into that. But a condo would "get you in the game" and hopefully will appreciate some while you are living there for free or next to nothing.

Then in about a year or two, rent out the condo and at that point maybe you are ready to qualify to buy a house that's in a good neighborhood and then you move into that.  But a condo would "get you in the game" and hopefully will appreciate some while you are living there for free or next to nothing.

Ron Gallagher · Answer

Another option is to expand your search to northern PG County. You can buy a house in Hyattsville for $350k with a second kitchen in the basement and live in the downstairs and rent out the upstairs.  Bonus if you can buy near UMD or on the UMD free shuttle route and then rent by the room to college students. There are ways to break into the DC market without buying a $1 million dollar house in NW DC.

Dion McNeeley · Answer

Hi @Nick Pisano, I hope this helps.

When I first started looking for investment properties I was not sure if I wanted SFH or small multi at first. So I was making offers on each.

There seem to be tons of people, investors and people looking for a primary residence. So almost every SFH I looked at went for way over asking and had many offers. One had 27 offers in the first 24 hours it was listed. When I looked into duplexes I found a very different amount of competition.

Last year I picked up three duplexes. All three had at least one other offer and one had a total of three offers. I got all three for the asking price (One was 10k less because it appraised low)

So while I still have my searches on the MLS looking at SFH I haven't bothered making any offers on them. I am still looking for another 2/3/4 plex for the next place.

I like the house hacking aspect for a few reasons. If you look for strictly an investment property you may have some cash flow but you do not eliminate any of your own monthly expenses for housing. If you house hack and stop having to pay for most or all of your own housing you will increase the amount you can save for the next place.

There is no one way that works best for everyone. You will find the way that works best for you.

Good luck.

Taylor Chiu · Answer

@Nick Pisano

Congrats on looking for your first deal! I grew up in the DC area, so I know what you mean when you say it's pricey...

I think house hacking can still be done in that area. Have you heard of "Guy on FIRE"? He's done several house hacks in that area, and he seems to be doing well. He lays out the numbers on his deals, so you can get a really good sense of how to replicate what he's doing.

He rents his places by the room, which allows him to maximize his cashflow.

Graham Nadler · Answer

Hi Nick,

Generally speaking you can assume investment transaction interest rates will be a point higher than owner occupied interest rates.  Sometimes more, sometimes less with a lot of factors going into this determination (credit score, income, address of property etc.). However 1% higher for investment properties (residential) is a good rule of thumb in differences between owner occupied and investment rates.  In terms of down payment depending on the type of property you would be looking at as little as 3-3.5% for a single family owner occupied.  I am sure you have read if you obtain an FHA mortgage your minimum down payment on 1-4 units owner occupied remains at 3.5%, however with conventional more than one unit you would be looking at anywhere from 5-20% down (depending on programs in your area).  Investment transactions require 20-25% down payment.  Fees should be generally the same across the board with residential transactions (residential 1-4 units). Hope this was helpful!

Thomas S. · Answer

The reality is that owner occupied, known as house hacking, is the lease expensive way to get into investing. Less expensive and less risk having multiple tenants contributing to your sustainability. If you can not afford, or qualify, for a house hack purchase you are not in a position to invest at all.

Keep looking for a house hack, it will be your lease costly start to investing.

First property - owner occupied or investment?

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